President Obama likes to portray himself as a man of the people. But a look behind the veil shows this to be a deception. Take the financial regulatory overhaul brewing in Washington.

I know what you’re thinking: What could better illustrate Obama’s bona fides as a champion of the people? He wants to regulate the banking industry after the recent debacle and is being fought by the banks and the Republicans. Doesn’t this clearly demonstrate his pro-people agenda?

A closer looks reveals the real story to be something quite different. First, there has never been an unregulated banking industry in the United States. You can look it up. And since 1914 we’ve had a central bank, the Fed, whose regulatory powers have only increased over the decades. Several other agencies also regulate the banks. There are regulators at the state level too.

But to focus only on regulation is to miss a big part of the story. In truth what we have had is a banking cartel, a partnership of government (state or national) and nominally private financial institutions. This partnership has two broad aspects that function as a quid pro quo: regulation and protection from free competition, that is, special privilege. The two sides haven’t always agreed on the exact proportions of the two elements, and the bankers have even disagreed among themselves. But lack of unanimity about details should not be mistaken for lack of agreement about the fundamental nature of the system. It is a government-banking alliance. Neither side would have it any other way.

Second and following from what has just been said, the government’s fingerprints are all over the banking debacle. Various agencies of the U.S. government hold major responsibility for what happened. That the banks raked in big profits doesn’t change that; it’s part of the whole story. Fannie Mae and Freddie Mac, both government-sponsored enterprises, encouraged dubious mortgage lending, then bundled vast numbers of the loans into securities. An agreement among the world’s central banks, the Basel II Accord, encouraged banks to hold those securities rather than mortgage loans they could vouch for. And a government-licensed rating cartel gave the shaky securities high marks. In myriad other ways government and banking together created the crisis.

This is old, if unappreciated, news. But we need the reminder because the proposed financial regulation overhaul addresses none of the fundamental causes of the banking breakdown. A real reform, one that had the people’s interests at heart, would be based on the principle that banking is too important to trust to a government-backed cartel. A cozy relationship among politicians, regulators, and bankers is a recipe for trouble. Recent history shows us that. And no matter what the new regulatory regime consists of, that cozy relationship will continue. The regulators will have to depend on the bankers for information and may indeed be drawn from the industry. (They may also intend to work in the industry later.) But even if the regulators initially see themselves as overlords, in time the law of “capture” will kick in and the cozy relationship will resume.

The upshot is that the government’s promise to represent the public is false. Even if it wanted to, it wouldn’t have the information required to do the job. The irony is that in presenting itself as the guardian against “systemic risk,” the regulators present the largest systemic risk of all. It’s the Federal Reserve after all that brought us the Great Depression and damaging inflationary booms and bust ever since.

So what can we do? A real program aimed at the people’s well-being would take decision-making away from the government-banking cartel and put the financial industry into a free and open market, where competition would discipline bankers and decentralize decision- making. No small group would be in a position to make economywide mistakes and then get bailed out by their friends in high places. Only in the free market is there accountability. Profits would be private, but so would losses.

Obama should study the Democrats of the 19th century, who stood for competition and free trade in all things, especially money and banking. The party has surely gone downhill since then.

Sheldon Richman is senior fellow at The Future of Freedom Foundation (www.fff.org) and editor of The Freeman magazine.